A cautionary tale of spousal benefits

JeffreyB. Miller

Jeffrey B. Miller is Professor of Economics Emeritus at the University of
Delaware. He earned his doctorate from the University of Pennsylvania in 1976
and taught at the University of Delaware for 36 years. In
2009 he co-founded Social
Security Choices, a firm that specializes in providing customized
information to assist people in formulating their best strategies for claiming
Social Security benefits. Dr Miller worked at Social Security after graduating
from college.
JMiller@socialsecuritychoices.com

Many couples can significantly enhance their lifetime Social Security earnings by having one of the pair claim spousal benefits at 66 years and delay personal benefits until 70 years of age.

This claiming strategy, which we call free spousal benefits, has been discussed here and elsewhere as one of the best ways to avoid the otherwise inevitable trade-off between getting money sooner (early claiming) and a larger benefit later (delayed claiming).

Having drunk the free-spousal-benefit pool-aid, an inquisitive client asked if the claiming strategy would work in the reverse. Instead of claiming spousal benefits first and then switching to personal benefits later, Karen wanted to know if she should claim her modest Social Security retirement benefits early, say at 62 years of age, and then switch to claiming her husband's larger spousal benefits later on. On its face, her idea seems to make sense.

However, let's look at how this actually works for Karen and her husband Burt. They are both 62 and their full retirement age is 66. Karen's full retirement benefit is $400 a month and Burt's is $2,000. Karen's maximum spousal benefit is $1,000 at 66 (that is half of Burt's age 66 retirement benefits). Burt plans to file for retirement benefits at 66, at which point Karen will be eligible to claim spousal benefits. Karen knows that she can claim retirement benefits early at age 62 and get $300/month (75% of the $400 she could get at her full retirement age). She also believes that at 66 she can switch to her spousal benefits and get $1,000.

On this last point Karen is wrong. When getting supplemental spousal benefits at 66, her full retirement age, her benefit will be $900, not $1,000.

The reasons for this are very convoluted. (A more complete description of the issues can be found at socialsecuritychoices.com/blog/?p=391.) While Karen was hopeful that the reduction in benefits from early claiming will be temporary, confined to benefits during her 62nd to 66th years of age, unfortunately this is not the case.

While claiming at 62 will provide Karen with income sooner, there is a cost. First, claiming at 62 means that she will receive only 75% of her retirement benefit. Secondly, the total benefit she will receive after getting the spousal supplement will be smaller than it would have been if she had waited until full retirement age to claim her retirement benefits. If she opts for this strategy, she will receive this smaller benefit for the rest of her life.

Approach the strategy of taking your own retirement benefits now and a supplemental spousal benefit later with caution. The rules here are especially complicated and Karen's example may not apply in your case.

It would be wise to consult an expert before pursuing such a strategy. The long-term benefit of claiming early might be lower than you expect.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.